By Danica Hampton
(Update 1: At 10 am Monday morning, NZ time, NZD/USD was down half a US cent around 0.6370.)
The NZD/USD spent most of Friday night within a 0.6350-0.6450 range.
The USD staged a bit of a recovery on Friday night. Japan's Finance Minister said his nation's confidence in US securities was "unshakeable" which helped ease concerns about souring offshore demand for USD denominated assets. Dreadful Eurozone data (industrial production fell -1.9%m/m in April vs. -0.4% forecast) also raised concerns about the health of the Eurozone economy. Against a generally firmer USD, NZD/USD was knocked from its highs.
While last week's RBNZ statement made it clear the "OCR could still move modestly lower over coming quarters" and that rates would remain "at or below the current level through until the latter part of 2010", this wasn't enough to stop market participants from being convinced the central bank has done its dash with regards to interest rate cuts. NZ 2-year swap rates rose about 25bps late last week (from 3.61% to 3.86%) and this was all that was needed to prompt further buying in the NZD. While the uptrend in NZD/USD stalled a little on Friday night, dips remained well supported with some macro and Asian accounts noted on buyers towards the day's lows.
Looking ahead, with little on the local data calendar, USD sentiment will hold the key to the near-term fortunes of the NZD/USD. After weakening steadily since mid-April, the USD found a bit of reprieve and spent last week going sideways in a 79.00-81.50 range. While we expect the USD to break lower eventually, the consolidation may have further to go near-term. While the USD Index remains above 79.00, we suspect NZD/USD will struggle to break above 0.6500-0.6550. However, while market participants remain convinced the RBNZ is approaching the end of its tightening cycle (and NZ swap rates continue to move higher), we expect NZD/USD to remain well supported on towards 0.6250.
The USD pushed higher against all the major currencies on Friday night. EUR/USD slipped from above 1.4100 to below 1.3950, while the USD Index rebounded about 1% from 79.50 to nearly 80.50.
Weak Eurozone data and comments from the Japanese Finance Minister were enough to trigger a reversal in the USD. Dreadful Eurozone data (Industrial production fell -1.9%m/m in April vs. -0.4% forecast) raised concerns about the health of the Eurozone economy, which weighed on EUR/USD. Meantime, Japan's Finance Minister said his nation's confidence in US securities was "unshakeable", which helped ease fears that foreign appetite for USD denominated assets is souring.
Modest gains were seen in US equities. Financial stocks were boosted by Bank of America's higher profit estimates and investors also showed an appetite for utilities and telecommunications stocks. The S&P500 rose 0.14% on Friday, its highest level in 7-months.
The G8 Finance Ministers met in Italy over the weekend. While the G8 didn't specifically discuss currencies, it's worth noting, the IMF's Kahn said the USD was correctly valued by the market and Russia's Finance Minister said the USD's role as a reserve currency was unlikely to change in the near future.
The G8 were relatively upbeat; confident the credit crisis was easing and the global economy would recover in coming months. Some ministers openly discussed exit strategies from the extraordinary fiscal and monetary stimulus; but US Treasury Secretary Geithner was a bit more cautious. Geithner said that the economic recovery must take hold before countries start implementing exit strategies and that it was unlikely that the Fed will hike interest rates anytime soon.
After weakening steadily since mid-April, the USD found a bit of reprieve last week. The USD Index failed to break below 79.00 and spent last week going sideways in a 79.00-81.50 range. While we expect the USD to break lower eventually, the consolidation may have further to go near-term. We will probably need to see a reversal of last week's US yield curve flattening to see the USD weakness resume. If not before, we would expect the Fed statement on 24 June to remind markets about the likelihood of an exceptionally low level of Fed funds rate for an extended period of time. Until then the 2-10 curve/USD correlation is working reasonably well. While the USD Index holds above 79.00, we'd expect EUR/USD to be capped at 1.4200 (with support at 1.3725).
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* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.
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